ATI Inc.

Hello and welcome to the ATI third quarter 2023 results conference call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 5 by 1 on your telephone keypad. If you'd like to remove your question, you can press star 5 by 2. And I'll hand it over to your host, Dave Weston, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to ATI's third quarter 2023 earnings call. Today's discussion is being broadcast on our website. Participating in today's call to share key points from our third quarter results are Bob Weatherby, board chair and CEO, and Don Newman, executive vice president and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlooks. It can be found on our website at atimaterials.com. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now, I'll turn the call over to Bob. Thanks, Dave.

Good morning, everyone. Q3 marked another solid quarter of A&D growth and continued margin expansion for ATI. This morning, I'll highlight three major points. First, aerospace and defense market demand for ATI products is strong, and we expect continued growth for years to come. Second, our transformational actions are driving meaningfully improved results. Better still, we're in the early stages of the journey with many benefits yet to come. Third, our strong execution is delivering for our customers and shareholders. And now some insights into each of these. First up, the continued strong aerospace and defense market demand for ATI's products. Orderly times for some specialty product lines are out as far as the first quarter of 2025, and we're still years away from peak airframe build rates. As recent world events reinforce, safety, security, and sustained performance remain more important than ever. ATI is well positioned to deliver on this expectation. We have the right products, the right capabilities, and the right team. A&D sales hit 61% in the third quarter, up from 58% in Q2. This is an all-time record for ATI, and we're well on our way to our 65% target. What drove this expansion? Another significant step up in airframe demand, notably in titanium. Shipments of airframe materials surpassed $200 million in the third quarter. That's up more than 50% from the third quarter last year. It's a new record for us, surpassing our prior Q2 2019 high watermark. How do we achieve this? Ramping build rates, realization of well-earned share gains, and a lot of hard work industry analysts commonly refer to as operational executions. Our increased titanium melt capacity in Oregon has been a critical enabler to our top line growth. The modest investment to restart these three furnaces, coupled with additional steps that optimize overall melt throughput, helped expand our titanium melt capacity by 35% over the 2022 baseline. It's now producing at full run rate. Customer commitments for ATI titanium are so strong that we're currently bringing online a fourth and most likely the last furnace at that same Oregon melt facility. This additional furnace will produce high value, especially titanium alloys that are in fierce demand by our customers with critical applications. It fills another gap left by the much discussed geopolitical disruption to the supply chain. This latest incremental step, coupled with highly efficient execution by our operating team, will enable an additional $50 million in titanium revenue per year. We're on track to ramp capacity in the first half of 2024, reaching that higher full run rate in the second half. This investment falls within our existing CapEx guidance. All in, we've increased titanium capacity by 45 percent through restarts and optimizations, up from the 35 percent we'd previously forecast. And we still have our Richland Washington melt expansion coming online in 2025. How strong is titanium demand today? In just 12 months, total ATI titanium sales are up approximately 75%. It's an incredible ramp. Strong demand, customer commitments, and these timely and efficient capacity additions. Some cases, we're the only game in town. And the stronger bottom line results are clearly ahead for us. Pretty exciting time to be part of ATI. Let's move to my second point. Our transformational actions are making a difference. They're delivering increased profitability with more room to expand. ATI's transformation, which began in the depths of COVID, is driving meaningful results in the business today. This was another quarter of sequential EBITDA growth and margin improvement. HPMC's EBITDA margins hit 21.5% in Q3. We're making great and steady progress. By 2025, we target delivering HPMC margins consistently in the low to mid-20% range. We're working every day to accelerate shipments, de-bottleneck and streamline operations, and optimize flow times throughout the system. As this high-value material works its way through ATI's finishing facilities, downstream operations are being tested and are delivering more than ever before. We're not immune to challenge. new bottlenecks emerge, and sometimes legacy electrical transformers fail. That was the case at our Lockport, New York MELD operation in Q3. While the operating team got the power back on relatively quickly, the outage created a potential divot in our Q4 shipments. The team has responded aggressively, taking steps to significantly offset what otherwise would be a Q4 bottom line impact. Strong demand means we've been running hard, so we're increasing our focus on preventive maintenance to ensure consistent operations. In our advanced alloys and solutions segment, aerospace and defense mix continues to improve. It reached 35% in Q3. That's eight points higher than a year ago. That's good news when you think of long-term growth opportunities for these markets. Industrial demand softens. We know that's caused by transitory conditions. Operationally, we've taken actions to align our near-term cost structure with this lower demand. Commercially, we're focused on optimizing our product mix. This is another reminder why being an aerospace and defense leader is at the core of our strategy. We're at our best in markets with long-term growth potential where ATI's differentiated capabilities are critical to our customers' success. and where the returns generated reflect the essential value of those materials. What else are we doing to transform? In October, we announced that we reduced our qualified pension obligations by 85 percent through annuitization and made additional contributions, which we expect will fully fund the remaining 15 percent. Let me take a second to be really clear here. This is a huge milestone for us and for the team at ATI. We've worked on this a long time. We've talked about it in almost every earnings call for five, six, seven, maybe a decade years. But we've been very deliberate in getting here, meeting our commitments to our retirees and to our shareholders. I'm pleased that we're at this point, appreciate the team's hard work and diligent preparation for something like an annuitization for what we accomplished. It's great. This transaction significantly de-risks ATI's balance sheet and enhances our ability to generate substantial cash flow going forward. As we share this pension annuitization of greatest benefit to the AANS segment, where we should see meaningfully lower pension expense starting this quarter. My third point today, ATI continues to deliver. Our adjusted earnings per share were 55 cents. This is above the midpoint of our August guidance. We see this momentum continuing into 2025 and beyond. Now, Don will take us through the financials and talk a bit about Q4 and what's ahead. Then I'll be back to close out and take us into the Q&A. Don?

Thank you, Bob. Our third quarter reinforces our strong foundation, rooted in growing A&D content. It's serving us well. Our adjusted APS of $0.55 per share outperformed the midpoint of our guidance Keep in mind, the prior guidance did not include 3 cents of interest expense related to debt supporting the pension annuitization and funding. The strength of our A&D business allowed us to increase total adjusted EBITDA margin while delivering our fifth consecutive quarter of revenue above $1 billion. As we look ahead to the fourth quarter and beyond, the resiliency of our performance and growth continues to carry our business and support value creation. In HBMC, our A&D content increased at 200 basis points to 85%, supporting an increase of EBITDA margin to 21.5%. The mix, pricing, and performance of this segment all align with current market conditions and the optimization of ATI around this building demand. EBITDA margins in our AANF segment at 10.4% reflect the previously communicated seasonal Q3 outages. which impacted the quarter's margins by approximately 200 basis points. AA&S margins should increase in the fourth quarter, driven by our production cycle and continued growth in our A&D and A&D-like markets. We will also see initial benefits from the recent pension actions. I would also note that we are ahead of our SRP transformation timeline, and we remain confident in our ability in delivering ANS 2025 EBITDA margins in the mid to upper teen percentage range. Turning to the balance sheet, we have a lot in motion as we continue to reshape this business for strong future cash generation. Managed working capital remains a focal point. Despite the level remaining near 40% of sales through Q3, we project meaningful improvement to managed working capital levels in Q4. This will be driven by inventory reductions as well as receivable and payable performance. Those initiatives are in process as we speak. Inventory is a key target area for improvement. As demand and our front end melt capacity increase, our team is optimizing that growth as it flows through to finished product and testing. We anticipate year end managed working capital will be between 31 and 32% of sales. This is slightly higher than our previous expectations, but we expect to largely offset that impact through CapEx management and performance in other areas. Therefore, we are narrowing our full year free cash flow guidance range to $130 to $160 million. Q4 cash flow should be very strong. While talking about the balance sheet, I want to further highlight the impact of our recent pension actions, including the annuitization. You'll recall we've taken many steps to reduce exposure over the past several years. Even so, our pension assets and liabilities still represented an element of forward risk for our shareholders, driven by market forces beyond our direct control. With the pension annuitization, approximately 85% of that risk has been successfully transferred out of ETI to a trusted and fully qualified third party. As a result of additional plan contributions, we expect our remaining obligations to be fully funded. As such, we no longer expect to make any material cash contributions to the qualified pension plans. I also want to emphasize that the annuitization and other pension actions taken in 2023 are expected to deliver substantial earnings benefits. Specifically, we expect to see annual pension expense drop more than $45 million from pre-annuitization run rates. These glide path steps have delivered the outcome that we were striving for. This largely gets us out of the pension business. Our cash balance exceeds $400 million following this activity. With a strong fourth quarter for cash flow, our outlook for net debt will only improve going forward. We intend to continue to deliver a balanced capital deployment strategy, funding growth while also de-levering and returning capital to shareholders. To that end, we purchased approximately $45 million in outstanding shares in the third quarter and expect to complete our remaining authorization of $30 million in the fourth quarter. We expect this cycle will continue and strengthen in the future with growth, performance, and reduced volatility on our balance sheet moving forward. Let's take a closer look at our guidance for the remainder of 2023. As we estimated previously, and reinforced with these results. We're tracking towards a strong fourth quarter and should carry momentum into 2024. As we approach the end of the year, we're targeting our guidance range for full-year APS to $2.20 to $2.30 per share, holding the previous midpoint of $2.25 per share. At this midpoint, our Q4 APS would center at 62 cents. representing the highest quarterly result for 2023. Robust A&D demand and increasing capacity, along with optimized cycles and performance, point to this high watermark in EPS as we look ahead. As I noted, our free cash flow estimate remains consistent with prior expectations. We're balancing the working capital pressure driven by our increasing sales with continued prudence and tight discipline over our capital investment. All significant expansions and projects, including our newly announced classified facility for additive manufacturing, remain on schedule. With that, we are still able to lower our current year capital expenditures to a range of $190 to $210 million. While we're not yet providing formal guidance for 2024, I will tell you that we see continued growth and expanding performance for next year, directionally aligned with the targets we've previously outlined for 2025. At our upcoming investor update on November 29th, we intend to offer more clarity and visibility into this growth. We'll also provide new perspective and details on the continued upward trend for ATI through 2025 and beyond, including insights into our 2027 financial targets. We hope you'll join us in person at the New York Stock Exchange for that event And by the way, registration is available on our website. With that, I will hand the call back over to Bob to conclude our opening remarks.

Thanks, Don. These are truly exciting times for ATI, and I'm confident in our sustained momentum and trajectory. Best of all, even 2025 won't be the peak of growth for ATI. We have many more years of growth ahead. with clear visibility and long-term agreements extending into the back half of the decade. We continue to shape our business to capitalize on increased demand while also insulating our business against future risk. I hope you'll join us later this month for our investor update in New York. As Don said, we'll talk a lot more about what that growth looks like and what it means for ATI and for our shareholders. With that, let's open the line for questions. Operator, we're ready for the first question.

Thank you. Our first question for today comes from David Strauss of Barclays. David, your line is now open. Please go ahead.

Thanks. Good morning, everyone. Good morning. I wanted to clarify the outlook for AAMS in the fourth quarter, Don. You know, you talked about in the release about assuming stable performance in the fourth quarter, but then in your remarks just now, you talked about margin improvement on the back of the pension, you know, lower pension, as well as not having the allergies. So, if you could just kind of square the two, what exactly you're assuming may be top line and margins for AA&S and Q4.

Yeah, great, fair question. So, for clarification, When we talk about stabilization, that was really a reference toward what we see in terms of sales trends. You know, we've seen some headwinds around the industrial, but we've also seen some tailwinds and good mix change in A&S related to their A&D exposure. But when we look at that overall business Q3 to Q4, we're really looking at a stabilization from a top line standpoint. But you're right, when you look at the bottom line, you would expect, hey, if you post a 10.5%, 4% margins in Q3, are you saying you're going to expect similar margins in Q4? The short answer is no. We would expect that the EBITDA, as well as the margins, should improve in A and S in Q4. A couple reasons to point to. One, Q3, we had some major outage costs. Think in terms of $8 to $10 million of those outage costs. Those won't repeat in Q4. Second good guy that we would expect in Q4 is tied to the pensions. And we talked about the pension, $45 million good guy on a run rate basis. We will see some of that benefit hit us in Q4. And when you think about the effect to ANS, you want to break it down like this. That $45 million annualized breaks down to about $11 million plus per quarter. And we're not going to get a full quarter's worth of that benefit. Of that $11 plus million at the corporation, we're going to get somewhere between seven and a half and nine and a half million, just because it's a partial period. I think we're going to get the higher end of that element. When you break it down to say, okay, how much of that is A&S? Think in terms of probably about 75% is A&S's share. And then the rest would be split between corporate and HPMC. Does that help you a bit?

Yeah, that's, That's more than I was hoping for, so thank you. Quick follow-up for Bob. One of the large engine manufacturers obviously is going to look to be replacing a lot of disks here over the next couple of years. Is there any incremental opportunity for you guys in terms of your forged disk business to help out there and pick up some share? Thanks.

Yeah, good question, David, and good morning. The simple answer, we'll stick with simple answers and try to over exceed your expectations today, David. I would say yes. Near term, you know, we're working very collaboratively with that engine producer to make sure, you know, their current flow paths, you know, continue to accelerate and flow well. You know, obviously with the increase in shop visits, we're seeing extra spares as other things come our way. I think in cases like this, a lot of times you see second sourcing or backup sourcing opportunities for both raw materials and forgings. And, you know, we have a great relationship there that I think will build off. So I think in the near term, it's doing everything we can help them on the flow side. Longer term, yep, there's opportunities probably on the raw materials and the forgings. Within our CapEx guidance that we've given you, we actually just finished an upgrade of one of our older isothermal forge presses with some new upgrade and controls systems. So we feel pretty good about the upside for isothermal forging going into the engine. And those guys and our relationship there can be a big part of that. So we're pretty excited about the upside. Probably we won't see it until 2025, 2026, 2027, but definitely on the right track.

Great. Thanks a lot. Thanks, David.

Thank you. Our next question comes from Richard Safran of Seaport Research. Your line is now open. Please go ahead.

Bob, Don, Dave, good morning.

Good morning, Rich.

So, to the best you can, could you try to make an apples to apples comparison between 2022 EPS and what you're guiding to for 23. You know, you strip out last year's favorable aviation credits. This year you had pension increase. Is it correct to say that EPS is close to a 50% increase? Now, those are my words, but I thought maybe you would bridge 2022 with what you're saying for 2023, kind of, you know, trying to apples to apples.

Well, Rich, you did all my math for me. So, you know, you're absolutely right. But for the benefit of the other folks on the call, let me, I'm aligned with what you just said. So when you think about our 2022 performance, we posted a $1.99 EPS, but there were non-recurring items that existed in there like COVID credits. And then we knew the pension expense was going to pop in 2023. If you pro forma for that, that gets you to about a 2022 EPS per full year at about $1.50, something in that range. And you compare that to the midpoint of the guidance, and this is the point that you're making, I believe, Phil. You point to the midpoint at $2.25. It implies about a 50% year-over-year increase in our earnings per share. And the good news there is, Number one, it's a great indicator of the underlying growth that exists in this business really being driven in large part by aerospace and defense strategy. And the other good news is that we're not expecting it to stop. We expect further growth, and we'll talk more about that when we're all together on November 29. But, you know, the increase you saw in 2023 ZPS, we think is a harbinger of good performance in the future as well.

Okay, and then lastly is this. I think you talked previously about the transactional piece of the business. You were being more selective with it, you know, high demand. I want to know if you could give a comment or two on the transactional part of the business, how that's trending, and if the work you're getting is margin accretive.

Yeah, good morning, Rich. I can go first. Don can add if he wants to at the end here, but It's definitely accretive. We start there. We've never been known in the industry as the low price guy. So we tend to see the value in the products. And we tend to be migrating to more of the challenging, more differentiated titanium and nickel alloys in that transactional business. The lead times are such that if you're a distributor or some of the smaller OEMs, You know, we said earlier, probably in May, if you knew anybody who was looking for titanium or nickel, they should get their orders on the books. And that's definitely happened. So it's accretive. You know, we tend to migrate more to OEMs because of the lead times and less to the distribution channel. But I would say, you know, still strong and still some opportunity. Our strategy is not to be 100% contractual. Our strategy is to be in that 80% contractual, 20%. transactional and we're holding that mix pretty well, but we are being selective about, you know, what kind of alloys and what kind of systems we play. And that actually factored into our decision to start the fourth furnace in Oregon, which tends to be some of the more challenging alloys, but higher value stuff, beta alloys, 5553, those kind of alloys as we move into the more sophisticated critical applications. So hopefully that helps, but definitely accretive.

Thanks very much.

Thank you. Our next question comes from Phil Gibbs of KeyBank Capital Markets. Phil, your line is now open. Please go ahead.

Hey, good morning.

Good morning, Phil.

Question is just on big picture on pricing and mix improvement. Is that expected to be a big driver in 24 and 25? It's obviously hard for us to see that and parse it out of the results, but I know intuitively it's a big enabler to margin improvement. For instance, a company like HOMAD is saying they're going to see about an $80 million increase next year, all of which goes to the bottom line, all else equals. Trying to just kind of see through in terms of how you all are thinking about that, given the fact that you've got thousands of contracts.

Right. Yeah, fair question. So the short answer is when you hear about some of our... We're pretty confident. We are not lagging at all in that regard. We are picking up our share. And as Bob said, we're typically not seen as a low-cost option, but a critical option in the industry. In terms of how to think about it going forward, Phil, you know, it's pretty clear to us. We've seen our A&D share percentage increasing. We hit 61%. We see continued growth in 2024, 2025, and beyond 2025 when it comes to that strong aerospace growth. And then we've got some other end markets that we serve that have similar growth trajectories. So, yeah, the short answer is we expect that you know, at 2024 and beyond, we all expect to continue to see improving mix, which should be a tailwind to our margins and our bottom line profits.

Is it just the mix shift or is there real underlying pricing improvement as well?

There is, to be clear, there's real underlying pricing as well. And we saw that, you know, we see that each period, especially when you look at HPMC, and the A&D exposure that AA&S has. When it comes to that space, you know, we have, you know, there's high demand, right? And that demand has not ebbed at all. And so we've been pretty, we've been pretty purposeful when it comes to ensuring that we're getting price where the opportunities are there. So it's not just mix. It is, we are seeing price as well. And we'll continue to.

And then secondly, You do have some near-term headwinds within energy. That was really strong for you the last couple of years. It seems to be sliding down a little bit. Are there any signs that that's leveling out? And then also regarding the stall business, and it's sort of been stuck in neutral here for a while. Any thoughts on if and when that turns a corner as well? That's it for me. Thanks.

All right.

Yeah, thanks, Phil. I'd say two questions in there. I would say on oil and gas, you know, our day-to-day presence there is in the subsea umbilical flow lines kind of space. And, you know, feedback we get from our customers is that we're seeing the bottom of that here in Q3, Q4. I would say Q1 will be kind of an uptick, but not where we want it to be yet. But by Q2 of next year, we should be back to pretty good strength in the the core part of our oil and gas. There's always projects, you know, the big clad pipelines. There's some kind of in the queue there that could also hit about the same time. So I think we believe we're at the bottom with our customers as they destock. That's really the issue. They're destocking here in Q3, Q4, and then they'll start to ramp back up after the first of the year. When it comes to stall, I would say we have definitely hit the bottom and we're starting to actually see a few signs. Don and I talked a lot about not projecting great uptick until we actually deliver a quarter of uptick. But I think, you know, we got to get through the Chinese New Year, but the signs are starting to be positive. It's not going to be a huge, fast ramp back, but I think that the signs are there that there's some positive economic signs in the markets, electronics, you know, that in particular, and those kinds of things in Asia. So more to come, but I would say by Q2 next year, meaningful improvement in China, particularly in our precision roll strip business.

Thank you. Thanks, Phil. Thank you. Our next question comes from Seth Seifman of J.P. Morgan. Your line is now open. Please go ahead.

Hey, thanks very much, and good morning, everyone. I wanted to ask a little bit about the morning. I wanted to ask a little bit about, you know, the engine and market saw that it looks like the sales were down a touch sequentially. I don't think, you know, anybody questions the direction of where this is going over the next few years. But, you know, as we think about the next few quarters, I think, you know, GE lowered the leap delivery guide for this year. Pratt obviously has to make some decisions about allocating resources between new engine builds and the shops, do you get signals from the OEMs regarding the trajectory of that ramp and how steep it is? And has that changed at all over the past several months?

Good question. Let's see. There's like three or four in there, Seth. I'll try to get to them. Let's see. So I agree with you. The strength in engines is very positive if you look. Year-to-date, 23 versus year-to-date, 22. We're up 30%. Remember, a lot of these orders got put on 10, 12, 14 months ago, so they didn't all get placed nice, evenly, those kinds of things. I would say that the indications we're getting are twofold. Number one is that the spares demand, you know, historically has been kind of a 25% adder to our OEM demand. You know, it's going to be 40%, 50%. higher or you know 40 to 50 percent of our business for two or three years to come based on the availability of new planes and certainly the wear and tear and the hours and those i think the second issue which don alluded to a little bit earlier was when we talk about mix one thing that's going to help us is the shift to wide body you know the engine manufacturers in europe are definitely moving in the right direction there on the wide body side and that's going to be a very positive for us. These are all nickel-based alloys, and we obviously had a little nickel fall off here. The price of nickel in the surcharge just went down a little bit in Q3, and that'll definitely come back. But to your point, you know, long-term trends, I think, are very positive. You know, we've done our part to increase our titanium capacity. And, you know, I think nickel alloys, you know, will be tight, you know, going into 2024, 2025. But That's based on that forward demand signal. So we feel pretty good about where we are and well positioned across the industry.

Great. Great. Thanks. And maybe as a follow-up, you touched on the wide-body question in engines. As we think about it on the airframe side, are you starting to see that ramp up kind of in earnest here? You know, we've had Boeing talked about another 737 rate increase to roughly five a month, you know, getting to the point where 777X production is going to, you know, start to pick up in anticipation of entry into service. You know, what are you seeing on the airframe side for widebodies?

Yeah, I think, you know, from an airframe perspective, it's very strong. I would say, you know, we're on the mill product side, you know, through the COVID period, we actually expanded our presence, you know, on both sides of the Atlantic. So, we're well positioned for both wide bodies wherever they're made in the world. And we are seeing definite strength. I would say, you know, the 787 issue. we probably are seeing the raw material buy equal to what they're talking about in terms of the uptick. You know, it's pretty strong. It's not just double digits. It's, you know, 30, 40, 50 percent, depending on the product type. So, I would say, you know, we're 12 months ahead of when they're going to use it in many cases, and we're seeing it. And we only produce to orders. We don't produce to the build forecast, as you know. You've heard us say that many times. But And we're not seeing a lot of cancellations, reschedules, that kind of stuff. A lot of emergent demand, like, oop, we need it right away kind of stuff. So positive and, yeah, well connected with obviously the OEMs, but very positive trend.

Great. Great. Thank you very much.

Thank you. Our next question comes from Team Natanas of Wolf Research. Your line is now open. Please go ahead.

Yeah, hey, good morning, everyone.

Hey, morning, Timna.

Morning. Wanted to point out, you're the only company in our coverage that's actually used the R word, so just thought we'd probe that a little bit with recessionary risk. It seems like your point was really to say that that's outside of your focal area, so just also picked up a little bit of commentary about ability to kind of maybe pivot away from some of these lower margin operations. And just wanted a little bit more color on how that could proceed going forward and how that might contribute to your margin expansion you've talked about in AANS.

Well, I'll let Don talk a little bit about the margin expansion piece, but we use two words that start with R. You heard the recessionary part, but that's really only about 15% of you know, our AANS segment. So it's a small part. We're spending a lot more time on the R part. That's the ramp, ramp, ramp in aerospace, right? So I think that's fair. But, Don, how would you answer, Tim, this question around the margins?

Well, you know, first, we've been pretty purposeful at changing the mix in the AANS segment. And we've talked about the fact that we want to continue to shift away from the industrial exposures and really shift toward A&D revenue. And so in that regard, just this last quarter, you would have seen that our A&D share within A&S increased about 800 basis points. And now the share within that segment is 35%, so more than a third of that portfolio. Doing things like that is a key part of us improving our margins. We've also been really purposeful in our transformation, changing our footprint, making sure that we're improving our flow paths, and really right-sizing cost structures in order to support this value-add strategy we're running, which should be beneficial. We're already seeing the benefits of that transformation, and there's more to come. So that's what I would share, Timon.

Okay, thanks. That's what it seemed like. I just wanted to clarify that. It seems like you want to keep some optionality in some of these end markets like energy that should be on the come, but kind of de-emphasize maybe some of the other areas, if that's a fair point.

You are absolutely right. You are absolutely right. And even within energy, by the way, there's specialty energy and there's oil and gas. Oil and gas we view as more of that industrial demand, commodity-driven, whereas specialty is where we want to play. So we're being... pretty refined and focused in terms of where we want to point this business.

Okay, thanks. And then a follow-up, more of a modeling question. We didn't see a big decrease in the share count from the buybacks. And just in general, with the great progress on reducing your pension liability there, should we expect to see kind of an acceleration of buybacks going forward and see that share count come down?

Yeah, it's a fair assumption. You know, so far in the last two years, we've had 225 million of buyback programs. You know, we're going to finish the current program. There's 30 million left on it. And Tim, you know, that's not the last program. You know, our focus is set this business up to generate max cash flow. And then we have a really clear balance strategy to grow the business with that capital to deliver. And then we very much enjoy returning capital to shareholders. So imagine that that is going to be a key to our deployment going forward. Okay.

Thank you.

You bet. Thank you. Our next question comes from Gautam Khanna from TD Cohen. Your line is now open. Please go ahead.

Hi. Good morning, guys.

Morning, Gautam.

I wanted to make sure I heard something right. Were there any operational challenges in the third quarter at HVMC?

You know, I would say there was one that we noted, Bob actually noted in his prepared remarks, and that was we did have an outage in one of our facilities, the Lockport facility, where we had a transformer outage. And that was actually, you know, a really good outcome and I think a positive indicator When Bob mentioned it, he said, hey, this was an event that happened, but we're covering it when it comes to our earnings guidance for Q4. So here's some key takeaways that I would mention. One is that was a transformer failure. It could have been an extended outage, but our team did an amazing job really getting it back online. So the outage is fully behind us, and it was in Q3. So, you know, fair question, got them as well. So why did you guys share it if you're going to cover that? you know, the consequences of that outage. And number one, you know, I think you're probably picking up, transparency is very important to this management team. So we want to share with investors when events like that happen. I think it's also a pretty good indicator, by the way, of the financial and operational strength that we have in this business to be able to deal with something like that quickly and then manage the financial consequences of it So, you know, one way to think about that outage is, you know, because the facility was down for about 21 days, that meant that we weren't getting the production cycles that we otherwise would have. And the products that are coming off of that facility are in pretty strong demand and we're selling out of our backlog. So you do the math on, well, what would the sales consequence to that be? It'd be in the range of about $35 million that would hit us in Q4, However, as Bob said, you know, our team is really covering that divot is the way we described it. And so when it comes to our Q4 guidance, we held our Q4 guidance. We're going to cover the consequences of that $35 million by reprioritizing other finishing activities that we've got going on and enter some cost action. So I think it's a, you know, that's one operational challenge I would mention. But I think it's important in that context.

I think to add a little color to that, Don, too, the one ATI strategy that Gautam's probably heard us talk about for many years is really taking hold in the melt side. And so when we have an issue, whether it's titanium or nickel, it has a modest effect on both segments because we leverage that capacity to feed both segments. But I think in this particular case, that's probably where Gautam picked up HPMC a little bit, but we're going to work through it. production, the de-bottlenecking, all that kind of stuff that allows us to cover the divot in Q4.

Gotcha. And was there actually a financial impact? Yeah, that very much helps. Was there a financial impact in Q3 that you could point out, whether it be loss absorption or otherwise? No? Okay. Okay.

Yeah, there was not. We had a particular little small bucket of incremental costs that we adjusted for, but when you look at the adjusted EBITDA, the answer is no. There's no consequence there.

Thank you. Just a quick follow-up. What are your preliminary views on the airframe business next year in terms of rate of growth relative to the jet engine?

Yeah, good question. You know, certainly where lead times are today, you know, we're booking into Q2, Q3 for some applications, and we even stretch out into Q1 2025 and some others. So from the order activity and the conversation we're having, we would see, you know, airframe growth It's going to be double digit for sure. I would say, you know, this year we saw airframe growth year over year, year to date, year to date up 60%. I don't think we'll see 60%, but we'll probably see something, you know, half of that or a third of that based on the order load. We still have some share gains that have yet to be fully realized on the airframe side that will come into play in 2024. So I think we'll see growth a little bit ahead of the rest of the market on the airframe side, especially on the titanium side as we bring on this fourth furnace. So I would say still strong growth going into 2024. Is that fair, Don?

Yes.

Thank you. Thank you. Our next question comes from Josh Sullivan of The Benchmark Company. The line is now open. Please go ahead.

Hey, good morning. Good morning, Josh.

Did you say what product or end market was impacted by the Lockport outage, that $35 million? Is that concentrated in one product or another?

What I would say is it would be across multiple products, so we haven't articulated any specifics around the products impacted.

And then just given the powder issue with the GTF, you know, it was an internal customer process. You know, ATI's got a very extensive history of metallurgy. Has there been any increased effort on engaging ATI's expertise to mitigate technology risk from OEMs, either on this product or generally, just looking at the outcome there? That's a pretty broad question, so I'll answer with a broad answer, which is yes. I mean, we have daily, weekly, quarterly technology exchanges with all the major OEMs, especially on the engine side. I think there's always, in this industry, a critical commitment to quality, looking for impurities, those kinds of things. How do we continue to improve? So those dialogues do go on. I think, obviously, qualifications are something the industry takes very seriously. And, you know, we're involved in almost all qualifications to give them, the OEMs, a second source on almost everything that they're looking for. So there are opportunities, and it's a constant, a positive continual conversation with them. I think there's upside for sure. And then just one last one. The reshoring gains in the medical side that you mentioned in the deck, is that VSMPO related or something else? I would say pretty much the VSMPO-related things is probably a good way to look at it.

Thank you for the time.

Thank you.

Thank you. At this time, we currently have no further questions, so I'll hand back to Dave Weston for any further remarks.

Thanks, Alex, and thanks again to everyone for joining us today. This concludes ATI's third quarter earnings call. A replay will be available on our website along with registration info for upcoming investor update on the 29th of November. Thanks and have a great day. Thank you for joining today's call. You may now disconnect your lines.